Case Blog

Two weeks ago in my posting, $1 Trillion Dollar Rescue Plan & a Changing of the Guard, I closed with: “This was clearly a historic week on the continent and in the United Kingdom. There is a new determination to deal with the structural issues that have left most of the countries with debt loads that the global bond markets can not support in the long run, and there is a new a resolve by these countries to put themselves on a course that will support sustainable long-term growth. The Obama administration will need to start addressing deficit reduction as well as we approach the November mid-term elections. Those of us in the private equity business will be closely watching the impact of government actions on recovering credit markets.”

Since I wrote that, Treasury Secretary Geithner visited England and Germany on his way back from China and advised them to take action to put the $1 trillion dollar rescue plan into effect. “After two years in which an historic financial crisis seemed to deprive the U.S. of its self-confident global economic leadership, Mr. Geithner signaled a newfound willingness to reassert American authority on the future of the world economy… ‘What Europe should do is implement the program they laid out,’ Mr. Geithner said Wednesday. The basic lesson of financial crises is that you have to come in and act quickly and with force.” (WSJ: May 26, 2010) Then on the 27th China denied it was reviewing its holding of Eurozone debt. “The denial—which followed a Financial Times report Wednesday about the State Administration of Foreign Exchange, an agency that rarely answers questions from the media—highlights China’s awareness of how volatile financial markets have become increasingly sensitive to even hints about how Beijing deploys its enormous foreign reserves.” (WSJ: May 27, 2010)

In spite of all of these efforts, the global equity markets were pummeled in May. “Between the ‘Flash Crash’ and angst over the worsening crisis in Europe, stocks suffered a dismal May, posting their worst decline for the month since Franklin Roosevelt was in the White House.” (WSJ: May 29, 2010) To further contribute to the slide, Fitch announced that they were downgrading Spain’s credit rating. (FT: May 28, 2010) What does this new religion about reducing deficits as a percentage of GDP mean going forward? I turned to Bill Gross’ June Investment Outlook letter, “Three Will Get You Two (or) Two Will Get You Three.” (Pimco) “So the developing predicament is becoming more obvious to Shakespeare’s ‘lenders and borrowers be,’ ” Gross writes. “Fiscal tightening and budget conservatism may have come too late for Greece and its global lookalikes. Continued deficit spending may be an exorbitant privilege extended to only a few. Caught in the middle are many developed countries that likely face New Normal growth rates and a continued bumpy journey toward that destination. Investors must respect this rather tortuous journey in the months and years ahead for what it is: A deleveraging process based upon too much debt and too little growth to service it. No longer will ‘two get you three’ in the investment world. Not 1,000%, but 4-6% annualized returns for a diversified portfolio of stocks and bonds is the likely outcome. And be careful — sometimes ‘three gets you two.’ ”

On a more positive industry note, the conference and exhibition business is showing signs of life after a very difficult ‘09. Informa, which derives almost 50% of its global revenues from events and training business, is a candidate “for promotion in next month’s Footsie index reshuffle.” (FT: May 25, 2010)

We are also enjoying a strong recovery in our events business at Asset International. On May 20th and 21st, ai5000 Editor-in-Chief Kip McDaniel produced our first Chief Investment Officer Summit (CIOS) in New York City. The event received high marks from all the attendees and sponsors. Our featured dinner speaker was Nassim Nicholas Taleb, best-selling author of The Black Swan, which has just been released in a second edition with a new section, “On Robustness and Fragility.” I highly recommend that this book gets added to your summer reading list.

We will hold our second CIOS event of the year in London on October 7th and 8th and once again Nassim Taleb will be the featured speaker and will explain how Black Swan events result in the market volatility we are experiencing.

I returned to New York City late on Thursday evening from a week in China. My trip, as I wrote in Summer’s End, was built around SWIFT’s Sibos 2009 event in Hong Kong.  It coincided with the one-year anniversary of Lehman Brothers’ filing for bankruptcy. As one looked around the exhibition hall in Hong Kong, it is clear that we are in a recovery. The press even reported during the week that Fed Chairman Ben Bernanke, in response to a question at the Brookings Institution said, “From a technical perspective, the recession is very likely over at this point. It’s still going to feel like a very weak economy for some time because many people will still find that their job security and their employment status is not what they wish it was.”  Dominic Hobson, editor-in-chief of Global Custodian, had a similar point-of-view when he told our guests at our event last Saturday evening in Hong Kong, to paraphrase: “That the world is still upside down, when the journalists are providing drinks for the bankers.”  I had the good fortune to follow Dominic to the podium and explain our plans for the global expansion of Asset International.

While the recovery will continue to expand, we will not see much job creation in the western economies over the next quarter or two. I am confident, though, that companies will start to add jobs in response to increasing demand by the second half of 2010. It was clear to me as we traveled to Beijing and Shanghai that China’s recovery was going to be much faster than the western economies  tied to the subprime debacle that took down Lehman Brothers and brought our entire banking system and the world’s major economies to the brink of the abyss. The energy and entrepreneurial spirit is alive and thriving in China.

We looked at several possible acquisition targets in China on this trip. While these businesses are still small by our standards, it is clear that they are growing quickly and that the demand for information and advisory services focused on the Chinese economy will continue to grow at a much faster pace than the overall economy.  We also came away with the understanding that the events business will continue to be an essential component of an overall strategy for growth in China.

Our second issue of ai5000 (www.ai5000.com), which will be released this week, will focus on the Asian/Pacific market with the cover story: The Metamorphosis of Chinese Capital.  Let us know if you have any colleagues that you would like to receive a complimentary subscription.

Last evening Mary Claire and I had the pleasure of dining at Eleven Madison Park. Chef Daniel Humm has made this the outstanding star in Danny Meyer’s restaurant universe. Daniel Humm came to Eleven Madison Park from Campton Place in San Francisco and has taken this restaurant to a new level over the past 12 months. Frank Bruni, who recently rotated out of his role of restaurant critic for the New York Times, elevated this lovely dining room to 4 stars on August 12th, 2009. The review is titled “A Daring Rise to the Top.” It is now at the pinnacle with Daniel and Per Se and just a handful of other establishments. Chef Humm works magic with his lobster dishes on most evenings. The wine list is extensive and clearly one of the best in the city. If you have a special occasion coming up, I strongly recommend that you call ahead early and make a reservation. www.elevenmadisonpark.com

With August drawing to a close as we enter the dog days of summer, we start to get ready for fall. The XXIX Olympic Games in Beijing are living up to their advance promise and NBC, in spite of this being the first Olympic Games with extensive live online coverage, is getting very good ratings. Michael Phelps’ outstanding performance, 8 gold medals, has certainly contributed to the global focus on Beijing.

As the world watched President Bush and Prime Minister Putin chat during the opening ceremonies, no one knew that Putin would quietly leave Beijing to personally direct the incursion into Georgia. President Sarkozy of France, who is also head of the European Union (this position rotates), quickly tried to broker a truce. He at first appeared to be successful, but as the days have dragged on, it is clear that Russia will pull back on its own terms.  What are Russia’s true ambitions? Will they turn their attention to Poland and the Ukraine, which have also aligned themselves with the west?  Both presumptive presidential nominees, Senator McCain and Senator Obama, have quickly turned their attention to foreign affairs. And the Bush administration is slowly realizing that the world balance has changed in a way they had not anticipated.

Back in the media market, we have seen the very successful introduction of Apple’s 3G iPhone. Its arrival was tied to the introduction of the App Store, which was promised by Steve Jobs at MacWorld in January. (See my blog, Mobile, January 27, 2008.)  By opening up the iPhone as a development platform, Apple has once again shown us the future.  I have downloaded two applications, Voice Dialer, which allow me to voice activate my contact database for calls, and the New York Times. The first one went very smoothly and I have added several updates since the first download. The New York Times application, which is excellent, unfortunately led to my iPhone freezing.  My advice is to download the iPhone’s very good user manual to your computer prior to downloading any apps. This will save you a trip to the local Apple Store to unfreeze your phone. I trust that Apple in an upcoming release will correct this problem, which has been widely reported in the press.

The mobile market as a whole is looking very promising. Google’s CEO Eric Schmidt weighed in this week, saying that the advertising opportunity for mobile will eventually eclipse Google’s current online advertising business. And Microsoft’s licensees for their mobile operating system will soon engage in this market with platforms that allow for custom applications for the user.

The end of summer has also brought with it the first of the NFL’s preseason games and the usual speculation about how the season will unfold. Brett Favre had Jets fans attention last evening in a preseason game against the Redskins. Can he, along with the other talent that Jets owner Woody Johnson has assembled in the offseason, allow the team to challenge the Patriots in their division? In his brief playing time, Favre did not appear to have lost any of the skills that made him a legend in Green Bay and he certainly was not ready, on a personal level, for retirement.  Will there be two playoff teams in New York in January? Which team will be most improved, the Miami Dolphins or the Oakland Raiders?

It will soon be time to return to work and the media deal market should become more active as well. And shortly after the upcoming Democratic and Republican conventions, all eyes will turn to the presidential election. Any forecasts on the candidates vice presidential running mates?

In the fall of last year I wrote about doing business in China and the many trips I made to China during my time at Reed Business (B2B in China). As I watched the XXIX Olympics’ masterful and beautifully choreographed opening-night ceremony on Friday evening, I thought back to many of my visits. My last one, in the fall of ‘06, when Mary Claire accompanied me, was one of my most memorable and as always my dear friend Hugo Shong was an impeccable host.

The historian Arnold Toynbee’s prophecy that the 21st century would belong to China is becoming more and more of a reality to the global community. This is China’s time on the world stage. As host to these 2008 Summer Olympic Games, the world will watch with awe and fascination this rich and complex culture.  I trust that it is time for me to plan another trip to China in the not too distant future. History is clearly a “long march” and there remain many opportunities for media investments for those who have patience.  I believe that the B2B sectors, in particular, will provide excellent returns over the long term. I also sense that the events and exposition business will prove very profitable.

For those of you now in Beijing, my favorite high-end restaurant is Tian Di Yi Jia, which translates into Heaven & Earth Restaurant. It is located at 140 Nan Chi Zi Dajie, Dongcheng, in Beijing. The phone number is 8511-5557. It is only a 5-minute cab ride from the Grand Hyatt Hotel. The cuisine is superb and it has a world-class wine list, with many first-growth Bordeaux wines, as well as outstanding wines from other parts of the world.

In late June, I wrote in a posting titled “Summer”: “As we move into summer, the financial markets continue to be unsettled, with the surge in oil prices continuing to depress the stock markets. Is this surge truly driven by demand from growth economies like China and India? I have a hard time reconciling this with the slowdown in growth the last several quarters around the globe, including both China and India. How much of this is driven by commodity speculation, which is fed by a weak U.S. dollar?” This past week we continued to see the price of a barrel of oil spiral downward to $116 and it now looks like a $100 per barrel price may be closer to becoming a reality than a $200 per barrel price. This fall has taken place concurrently with the strengthening of the U.S. dollar versus the Euro and other world currencies.

NOTE: This column first appeared min’s b2b.

During my last two years at Reed Business, I made 10 trips to China. I was very fortunate during this time to have an excellent partner in Hugo Shong, the Managing Director of IDG China and a general partner in IDG’s burgeoning venture capital business. If you want to do business in China, I strongly recommend the partnership approach–choosing the right partner is the key to success.

During my tenure at IDG in the ’90s, Hugo and I were both colleagues and friends. I had come to admire his intelligence, work ethic and the outstanding results he produced. Pat McGovern, IDG’s chairman and founder, had personally recruited Hugo to IDG. Pat understood that to be successful in China he needed a trusted person who could help him find the right partners to grow his brands in the Asia-Pacific region. Pat had launched Computerworld China in the early ’80s, and as the tech sector exploded in the early ’90s CW was well positioned to chronicle the growth, both globally and in China. With Hugo Shong’s arrival, IDG soon became the unrivaled tech media giant in China. The profits made in the tech sector led to a joint venture in the consumer market with Hearst, initially with Cosmopolitan China, which today is China’s largest consumer magazine (by measuring ad pages). The tech success also allowed IDG Ventures China to become the major force in venture capital investing in China. Hugo Shong and his very able colleague Quan Zhou, who drives the day-to-day investments, have never looked back, and their results are formidable. One of their early investments that had a significant return last year was the Chinese search engine, Baidu (BIDU), which trades on the NASDAQ.

While most companies think of China’s large population in terms of providing a tremendous consumer marketing opportunity, the B2B information services opportunities are equally as attractive and could yield even greater results over time.

For years, many venture capitalists from outside China approached IDG’s team about partnering, and two years ago IDG decided to partner with Accel Partners and Jim Breyer. Their first fund is doing very well and they are in the process of raising a second fund. Even strong U.S.-based venture firms need Chinese partners.

Reed Business was very fortunate to have Hugo’s guidance and partnership as we launched our joint venture company in China. I have learned over the years that even fierce competitors can become partners when each is able to contribute unique assets to a venture. In our case, Reed had some very strong brands with the potential to be global, and IDG had the benefit of doing business in China for more than 20 years, which gave them a significant infrastructure. Partnerships and joint ventures are never easy, but they are often worth the investment of time and nurturing because of their potential to yield very real dividends.

Leaders need to provide the vision and the pioneering spirit to open new markets. Sometimes this means that they must wander for years in the wilderness, believing in their vision while others struggle to understand it, and forging ahead until the results of their work demonstrate to everyone that their vision provided a clear path to growth. Pat McGovern clearly had the vision of China’s growing importance on the world stage long before almost anyone.

While I am writing about a Boston-headquartered company, IDG, I need to take this opportunity to point out that my alma mater, Boston College is 5-0 in the ACC, sixth in the country, and has a strong partner it couldn’t do without in Matt Ryan, the team’s first real Heisman Trophy contender since Doug Flutie. Couldn’t resist: Go Eagles!